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55. More Comprehensive Credit Reporting

Models of more comprehensive credit reporting

55.109 There is a spectrum of views about the categories of personal
information that should be able to be collected as part of a more comprehensive
credit reporting system. In the Discussion Paper, Review of Australian
Privacy Law (DP 72), the ALRC identified a lack of consensus regarding
a preferred model of comprehensive reporting.[156]
In the past, this has hindered debate about whether more comprehensive
reporting should be introduced, including in the context of previous government
inquiries.[157]
More recently, a significant number of credit providers have reached broad
agreement on the desirable elements of a more comprehensive credit reporting
system, including on the categories of personal information that should be
collected.

New categories of personal information

55.110 An
important focus of the Inquiry has been on whether Australian law should be
amended to expand the categories of personal information that may be collected
and used in credit reporting and, if so, what categories of personal
information should be permitted. The following discussion focuses only on
categories of personal information that concern an individual’s current credit
commitments or repayment performance. Chapter 56 deals with the collection
of other categories of personal information, such as identifying information.

55.111 In
response to the Issues Paper, Review of Privacy—Credit Reporting Provisions
(IP 32),[158]
a range of views was expressed, from those suggesting loosening prohibitions on
the content of credit reporting information through to those suggesting only
minor extensions to the content currently permitted under s 18E of the Privacy
Act.

55.112 Some
credit reporting agencies and credit providers favoured removing the existing
restrictions and permitting the collection of an extensive range of information
about accounts, repayment performance and current credit commitments.[159]
An alternative approach, proposed by Dun and Bradstreet, would permit credit
reports to contain a limited number of additional data elements only, including
information identifying an individual’s open accounts and credit limits.[160]
Some credit providers considered that these categories of information were the
minimum necessary to deliver benefits in credit decision making. On the other
hand, this more limited model of more comprehensive reporting was criticised by
others in the credit industry, primarily because it ‘lacks the most predictive
risk data that is the repayment history’.[161]

Discussion Paper proposal

55.113 In
DP 72, the ALRC proposed that the new Privacy (Credit Reporting
Information) Regulations should permit the inclusion in credit reporting
information of the following categories of personal information, in addition to
those currently permitted under s 18E of the Privacy Act:

the type of each current credit account opened (for example,
mortgage, personal loan, credit card);

the date on which each current credit account was opened;

the limit of each current credit account (for example, initial
advance, amount of credit approved, approved limit); and

55.114 This
modest extension of the current reporting system (the ALRC proposal) had some
support from both industry and consumer groups. Importantly, credit providers
would have access to more information about an individual’s current credit
commitments to assist in promoting responsible lending. The ALRC stated that
this extension in credit reporting information would provide much of the
additional predictiveness desired by proponents of more comprehensive
reporting.[163]

Submissions and consultations

55.115 There was
broad support for the implementation of some form of more comprehensive
reporting, especially from credit reporting agencies and credit providers.[164]
Those in favour of more comprehensive credit reporting included those who
supported the ALRC proposal as the preferable model (or as a worthwhile
expansion of permissible credit reporting information);[165]
and those who favoured further expansion beyond that proposed by the ALRC.[166]

The ALRC proposal

55.116 Dun and
Bradstreet submitted that, at this stage, the ALRC proposal ‘extends far
enough’ and finds an ‘appropriate balance between the extremes of the existing
Australian system and the full-file of the United States’:

The
ALRC proposal creates a unique opportunity for lenders to demonstrate the
benefits that can arise from better quality data and accordingly provides a
powerful incentive for lenders to embrace this reform fully.[167]

55.117 While
supporting the inclusion of repayment performance information, the ANZ
considered that the ALRC proposal constituted ‘an appropriately balanced
approach that promotes both credit market efficiency and privacy protection’.[168]
MGIC Australia stated that

this small extension will provide
credit providers with a more complete knowledge of an individual’s current
commitments which will assist the lender in applying a prudent approach to
credit approval and provide consumers with protection against over-commitment.[169]

55.118 Another
group of stakeholders favoured an extension of permissible credit reporting
information beyond that proposed by the ALRC. Most submissions from these
stakeholders expressly endorsed a model proposed by ARCA. This proposal (the
ARCA model), discussed below, would permit credit reporting information to
include information about individuals’ repayment performance.

55.119 Credit
industry stakeholders argued that the additional predictive power that would be
available under the ALRC’s proposal would be insufficient to justify the
expenditure required by credit providers to modify reporting and credit scoring
systems to take advantage of the additional data items.[170]
The AFC, for example, submitted that

in
order for the industry to participate in a more enhanced reporting environment,
there has to be value that off-sets implementation costs. Based on feedback
from our members, we submit that … the [ALRC proposal] may have limited value
and consequently take-up by the industry. For example, the inclusion of a
credit card limit figure does not give a true picture of debtor’s commitments
unless it can be changed to reflect the balance outstanding at [a] point in
time.[171]

55.120 Many
stakeholders considered, however, that the addition of repayment performance
information would ‘tip the balance’ and lead to a significant improvement in
the ability of credit providers to assess credit worthiness.

The ARCA proposal

55.121 In this
context, ARCA proposed that, in addition to the data items comprised in the
ALRC proposal,[172]
credit reporting information should include a 24-month history of repayment.
This would be represented by a series of codes so that the system:

assigns a ‘0’ for no payment
required, a ‘1’ for a payment required and made, a ‘2’ for one contractual
payments missed, a ‘3’ for two contractual payments missed, and so forth up to
‘7’ for 6 or more payments missed (180 or more days delinquent). Other codes
such as ‘B’ would be recorded if the account was included in a bankruptcy, or
‘D’ if the status of the account was in ‘dispute’, or ‘H’ if the account was
involved in a hardship arrangement.[173]

55.122 ARCA
considered that this extension to the permitted items proposed by the ALRC
would ‘significantly improve responsible lending and most importantly will be
implemented by credit providers and credit reference agencies’.[174]

55.123 Veda
Advantage supported the ARCA approach and stated that it did not believe that
‘any further compromise is possible without fatally decreasing the predictive
power of the comprehensive information’.[175]
Similarly, the ANZ stated that while

the inclusion of the information proposed by the ALRC will
improve marginally the quality of lending decisions and pricing of risk … in
order to gain a more accurate and complete assessment of a customer’s credit
worthiness it is important to have some level of historical repayment data.[176]

Research on predictive value

55.124 The case
for allowing credit reporting information to include repayment performance
information on the ARCA model was supported by the results of research
conducted by several major credit providers following the release of DP 72.

55.125 As
discussed in DP 72,[177]
Veda Advantage proposed to conduct a data study to model the effect that more
comprehensive consumer credit reporting would have on the accuracy of credit
providers’ application risk evaluation. It proposed to use information from
Veda’s credit reporting database and more comprehensive ‘positive’ information,
including credit card application, account and payment histories, provided by
participating credit providers.[178]
This data study did not eventuate, in part because of the constraints imposed
by the Privacy Act.

55.126 On the initiative of ARCA, and to provide evidence supporting the
case for more comprehensive credit reporting, the four major banks and a number
of international financial services groups undertook analyses of their own internal
data to estimate the relative predictiveness of different variables that might
be included in a more comprehensive credit reporting system. The studies
assumed a full set of possible credit reporting variables (including repayment
performance information and current balances) to have a ‘weighted performance’
of 100%, and compared the performance of these comprehensive variables with
those permitted by the ALRC and ARCA proposals respectively. The results were
reported in the following table:[179]

55.127 Broadly
speaking, the combined result of these studies, by four major banks and a
number of international financial services groups, showed that the ALRC
proposal would provide 33% of the potential predictive value of fully
comprehensive credit reporting.[185]
In comparison, the inclusion of repayment performance information, as proposed
by ARCA, would provide 74% of the potential predictive value of fully
comprehensive credit reporting.[186]

55.128 In assessing the implications of these research results, it should be
noted that there are some discrepancies between the assumptions described in
the research model and the ALRC and ARCA proposals, as described in DP 72
and in this Report.[187]
The research methodology and results have not been independently verified, and
the disaggregated results of the research conducted by each institution are
commercially sensitive.

55.129 The
research results can be viewed from different perspectives. While put forward
as evidence of the inadequacy of the ALRC proposal, Dun and Bradstreet
commented that the analysis:

demonstrates that while the
greatest benefit comes from a full-file system, there is still considerable
benefit from data elements reflecting the ALRC proposed model. In particular it
shows that the predictive power arising from adding additional data allowed
under the ALRC proposal increases by 23%.[188]

55.130 Some stakeholders suggested that even the ARCA proposal did not go far
enough towards a fully comprehensive credit reporting system, which would
permit, for example, the inclusion of information about current balances and
repayment amounts.[189]
In addition, some proponents of the ARCA proposal saw it as a compromise or
interim position—and considered that the permitted content of credit reporting
information should be expanded further in future.[190]

55.131 ARCA itself noted that ‘full comprehensive credit reporting would
provide the optimum solution’ and has put forward its proposal in order to
facilitate a ‘gradual process of implementation’.[191]
Specifically, credit providers continued to believe that information about
current balances should be available through the credit reporting system.[192]
National Australia Bank, for example, submitted that

the balance of credit account
and/or associated limit utilisation would provide for an even more informed
lending decision to ensure borrowers are not placed in situations where they
cannot meet their obligations. This should be considered as a future
enhancement.[193]

55.132 Citibank Pty
Ltd maintained the view that including the current outstanding balance should
be permitted ‘to provide the optimum support for responsible lending and
assessing customers credit worthiness’.[194]
MasterCard stated:

Without allowing current
balance information to be stored on an individual’s credit report, lenders do
not have a source to confirm whether the statement is an accurate reflection of
the borrower’s true position.[195]

Opposition to more comprehensive credit reporting

55.133 Consumer
groups, privacy advocates and regulators generally opposed more comprehensive
credit reporting.[196]
The potential benefits of, and some of the problems associated with, more
comprehensive reporting as perceived by these stakeholders are discussed above.
These stakeholders also focused on alternatives, and desirable pre-conditions
to, the possible introduction of more comprehensive credit reporting.

55.134 Some
stakeholders observed that, if additional information is required by credit
providers in order to assess an individual’s eligibility for credit, this
information can be sought from the individual directly or from a third party
with the individual’s consent.[197]

55.135 The
Banking and Financial Services Ombudsman (BFSO) noted that credit providers can
reduce information asymmetry ‘by asking for details of all current credit
facilities as part of the application process and requiring consumer
declarations as to the accuracy of the information’. Therefore, addressing the
‘absence of a comprehensive dispute resolution regime and the ability to report
unregulated credit … would appear to be the more immediate priorities’ than
implementing more comprehensive credit reporting.[198]
Telstra stated that the additional information proposed to be permitted by the
ALRC is available to credit providers who ‘wish to make the relevant inquiries
and obtain the required consents’ and ‘should not automatically form part of
credit information files’.[199]

55.136 Some
stakeholders who opposed the introduction of more comprehensive credit
reporting submitted that the focus of the present Inquiry should be on reforms
to improve the current credit reporting system, before any consideration is
given to its extension. In this context, the Victorian Review noted that
alternatives to both the status quo and comprehensive credit reporting include:

Improving the existing negative
reporting scheme in terms of its accuracy.

Providing additional incentives
for credit reporting agencies to maintain accurate and complete data. For
example, requiring credit reporting agencies to pay a specified amount to a
consumer in each case where information is reported as inaccurate may assist in
addressing current information asymmetry within the current system.

Requiring consumer declarations in
relation to loan applications.

Expanding financial literacy
programs to encourage better self-selection by consumers and shopping for
credit by consumers.[200]

55.137 The
Australian Privacy Foundation submitted that the ALRC should recommend that any
further consideration of comprehensive reporting be ‘deferred until after
experience with an initial round of reforms resulting from the current Review’.[201]
National Legal Aid also stated that it would oppose the introduction of more
comprehensive reporting ‘until there is positive progress on addressing the
major defects of the current scheme’.[202]

55.138 A number
of stakeholders suggested that further study is required before reaching any
decision to recommend the implementation of more comprehensive credit
reporting,[203]
including studies which focus on the possible impact on over-indebtedness and
access to affordable credit.[204]

55.139 The OPC
submitted that independent research should be conducted on the impact that
comprehensive credit reporting would have on the Australian financial system
and Australian consumers. It was suggested that this research should provide
recommendations about: whether comprehensive credit reporting should be
introduced in Australia; and, if comprehensive credit reporting were to be
introduced, what model should be adopted; which industry participants should be
included in the expanded system; and what compliance framework should be imposed.
The ALRC’s proposals would be considered as part of this research.[205]

Credit reporting and responsible lending

55.140 The link
between more comprehensive reporting and responsible lending practices was
highlighted by consumer and privacy advocates. These stakeholders considered
that changes to consumer credit regulation to require responsible lending
should be a pre-condition to the introduction of more comprehensive credit
reporting.[206]
The Consumer Action Law Centre, for example, stated:

Appropriate regulation of
credit marketing and irresponsible lending in Australia could minimise the
negative effects of expanding credit reporting information. However this would
need to be implemented before consideration is given to expanding credit
reporting information.[207]

55.141 The
Cyberspace Law and Policy Centre submitted that:

No additional classes of
information should be permitted in credit information files unless there are
simultaneous changes to consumer credit regulation including an obligation to
lend responsibly including taking into account all available information.[208]

55.142 It was
observed that while industry stakeholders, in promoting a move towards more
comprehensive credit reporting, have emphasised potential benefits in relation
to responsible lending, credit providers are under no positive legal obligation
to engage in responsible lending. Galexia noted that the limited ‘shield’
provision of the Consumer Credit Code[209]
(discussed above) under which a court may reopen an unjust transaction is the
only relevant legislative provision.[210]

There is no general licensing
scheme or regulation for credit providers in Australia that requires them to be
responsible lenders. Specifically there is no requirement that lenders assess a
consumers’ ability to repay a loan without suffering undue hardship.[211]

ALRC’s view

55.143 The ALRC
recognises that, according to widely accepted economic theory, making more
information available to credit providers will tend to increase efficiency in
the market for credit. It also will assist in making credit more available to
those able to repay and reduce rates of default (or both).[212]
There was no significant disagreement among stakeholders that more
comprehensive credit reporting has the potential to improve risk assessment by
credit providers, even among those who expressed concerns about how this
improved risk assessment would be used in the credit market.

55.144 There are
many possible approaches to reform of the credit reporting provisions to permit
more comprehensive credit reporting. The spectrum of choice ranges from
recommending no changes in the categories of information now permitted,
extensions to these categories such as those as proposed by the ALRC in
DP 72 and by ARCA, through to fully comprehensive credit reporting such as
exists in the US.

Benefits of more comprehensive credit reporting

55.145 Proponents
of more comprehensive credit reporting have sought to justify reform by
reference to potential benefits arising from improved credit market competition
and efficiency, resulting in decreased levels of consumer over-indebtedness and
default, lower cost and higher availability of credit.

55.146 While
industry stakeholders have presented considerable evidence and argument to
support these expected outcomes, the ALRC is not convinced these outcomes are
sufficiently certain to justify the implementation of more comprehensive credit
reporting. The fundamental point is that any credit reporting system is only
one tool, albeit an important one, used by credit providers to assess risk and
to determine lending practices. This tool can be used in different ways, which
may depend on other factors including, for example, a particular credit
provider’s competitive position in the market. The information available
through the credit reporting system ultimately cannot dictate what lending
practices will emerge or prevail in the marketplace.

55.147 This fact
has been emphasised recently by the so-called ‘subprime’ crisis. In the US, high levels of default on subprime loans contributed to an ongoing liquidity crisis in
global financial markets, which began in mid-2007.[213]
While the term ‘subprime’ is not consistently defined in the marketplace or
among individual institutions, US regulators have defined subprime lending as

55.148 The
comprehensive credit reporting information available to lenders in the US might be expected to have assisted lenders in proper risk assessment. Commentary has
suggested, however, that credit scoring such as that provided by the Fair Isaac
Corporation (FICO) was not effective in preventing lenders from advancing risky
loans:

FICO scores are built on data
gathered by the three big credit bureaus. The score is heavily influenced by
the amount of debt a borrower already has and by payment history … But mortgage
lenders got a little too confident in FICO and failed to give adequate weight
to two other factors in a mortgage application: how much the borrower is
putting down and how well he has documented his income.[215]

55.149 The ALRC
recognises that risk assessment practices were not the only factor contributing
to the subprime crisis. Other factors included aggressive marketing practices,
such as the use of low fixed introductory (‘teaser’) interest rates, and
promoting loans through brokers with financial incentives to close deals.[216]
Arguably, one lesson that may be drawn from the US subprime lending experience
is that the availability of comprehensive credit reporting information, on
which to base proper risk assessment, will not necessarily produce responsible
lending. The availability of risk assessment tools do not dictate lending
policies—lenders do.

55.150 Some
stakeholders identified the current Australian economic environment as an
important reason to implement more comprehensive reporting.[217]
Veda Advantage, for example, referred to high levels of household debt and
concerns about an economic downturn and stated that:

In these circumstances,
Australian borrowers and lenders need the best credit information and stronger
consumer protection to help manage their risk. This is the most compelling
argument for reform of the credit reporting provisions of the Privacy Act.[218]

55.151 As
discussed above, it is hard to draw any firm conclusions about the impact of
credit reporting systems on credit markets and the economy generally. In any
case, research results cannot determine the policy position to be adopted. Any
proven economic benefit still needs to be balanced against individual privacy
rights and the risk of breach of those rights. An appropriate balance needs to
be struck between efficiency in credit markets and privacy protection.

55.152 The most
compelling argument for more comprehensive credit reporting is based on
assisting credit providers to practise responsible lending. More comprehensive
credit reporting clearly has the potential to enable credit providers to assess
better individuals’ capacity repay and the risk that credit will not be repaid.

55.153 The
current limitations on the permitted content of credit reporting information do
not work in the best interests of either industry or consumers. As noted above,
industry research suggests that the credit reporting information currently
available provides only 10% of the potential predictive value of fully
comprehensive credit reporting.[219]
Whatever the precision of this figure, it is clear that the existing
constraints significantly limit the predictive power of credit reporting
information.

55.154 An
effective credit reporting system should enable a credit provider to verify an
individual’s potential credit commitments. The additional categories of credit
reporting information recommended by the ALRC would assist to highlight
discrepancies with the information provided by an individual credit applicant.
At the very least, credit providers should be able to confirm whether an
inquiry from another credit provider resulted in credit being granted. From the
consumer side, there are also concerns about the currently misleading nature of
inquiry information.[220]

Repayment performance information

55.155 The
categories of personal information currently permitted in credit reporting
information should be augmented, as proposed in DP 72.[221]
The remaining question is whether the categories should be extended further to
include repayment performance information, along the lines suggested by ARCA
and others. A good case for the inclusion of repayment performance information
can be made.

55.156 ARCA has
proposed that credit reporting information should include a 24-month history of
repayment.[222]
This would not record the amount of any repayment, but would represent
repayments by codes indicating, at each point in the repayment cycle, whether a
repayment was required and whether contractual payments have been missed.[223]

55.157 At
present, the Privacy Act permits the inclusion in credit information
files of information about credit where the individual is at least 60 days
overdue in making a payment and the credit provider has taken steps towards
recovery of the amount outstanding.[224]
This is often referred to as ‘default’ information or overdue payment
information.

55.158 From one
perspective, the proposed ‘negative’ repayment performance information is
simply a more differentiated and comprehensive version of the default
information currently collected—relevant to more specific time periods and
forming a historical record. Under the ARCA proposal, the system also would
record that no repayment was required or that a repayment was required and
made. This information is ‘positive’ information that tends to work in favour
of an individual in his or her dealings with credit providers, by indicating
willingness to repay.

55.159 Some
credit providers and credit reporting agencies suggest that the more limited
extension of the credit reporting system proposed by the ALRC may not provide a
sufficient incentive for the industry to bear the costs of
implementation—despite, on ARCA’s figures, contributing another 23% of the
predictive power of the full set of credit reporting variables. This view was
not shared by other industry stakeholders, as discussed above, and is not
accepted by the ALRC. Credit providers have, nevertheless, presented a strong
case that repayment performance information would significantly improve the
predictive value of credit reporting information and would be implemented by
credit providers, if permitted by law.

55.160 The ALRC
recommends that the new Privacy (Credit Reporting Information) Regulations should
permit credit reporting information to include some repayment performance
history. For these purposes, an individual’s repayment performance history
should comprise only information indicating:

whether, over the prior two years, the individual was meeting his
or her repayment obligations as at each point of the relevant repayment cycle
for a credit account; and, if not

the number of repayment cycles the individual was in arrears.

55.161 The ALRC
recognises that implementation of this recommendation will result in the
sharing between credit reporting agencies and credit providers of more detailed
information about the conduct of individuals with respect to credit and,
therefore, a corresponding reduction in information privacy.

55.162 Credit
reporting agencies will be permitted, for example, to collect and report
information indicating that an individual was on time, or 30, 60 or 90 days
late, in making a payment due under his or her credit card or other credit
account. This detailed information may be collected about any individual who
opens a credit account, even where that individual has never failed to meet his
or her credit obligations. The information, as is the case with existing credit
reporting information, will be collected, used and disclosed without the
express consent of the individual concerned.

55.163 The
recommended system of more comprehensive credit reporting would, however,
retain the prohibition on the collection or reporting of the current balances
of credit accounts or the amounts of repayments made or overdue.

55.164 For the
reasons set out in this chapter, the ALRC concludes that the balance tips in
favour of allowing repayment performance information provided that, as
discussed below, consideration is given to the enactment of new responsible
lending obligations.

55.165 Further,
the ALRC’s recommendations that an extension be permitted in the categories of
personal information that may be collected in credit reporting are intended as
part of broader reform of the credit reporting system. Submissions emphasised
the need to review and improve the existing regime of privacy protection,
regardless of whether more comprehensive credit reporting is permitted by
legislation or implemented by the finance industry.[225]

55.166 The ALRC
agrees with this approach. Other changes to the regulation of credit reporting
recommended in Chapters 56–59 are intended, among other things, expressly
to prohibit the use or disclosure of credit reporting information in direct
marketing, promote consistency and accuracy in the reporting of overdue
payments, and improve complaint-handling and dispute resolution processes. If
these other changes are not implemented, the foundation to support more
comprehensive credit reporting falls away.

Responsible lending obligations

55.167 In the
course of the Inquiry, it became clear that many stakeholders considered that
consumer credit legislation should be reformed to promote more responsible
lending before any form of more comprehensive credit reporting is introduced.
Galexia, for example, stated that regulation of responsible lending and credit
marketing should include regulation of ‘what factors should be included in a
proper assessment of a consumer’s capacity to repay a loan’.[226]

55.168 A number
of parliamentary reports have recommended reform relevant to responsible lending
obligations. In 2005, the Senate Economics Committee recommended that the
states and the Northern Territory develop ‘uniform consumer credit legislation
requiring credit providers to undertake appropriate checks of borrowers’
capacity to pay before issuing new credit cards or raising credit limits’.[227]

55.169 In its
2007 report Home Loan Lending,[228]
the House of Representatives Standing Committee on Economics, Finance and
Public Administration outlined a range of concerns with the current Consumer
Credit Code regime, including the weak requirements on credit providers to
assess individuals’ capacity to repay and the ability of credit providers to
avoid the Consumer Credit Code by requiring individuals to sign
‘business purpose declarations’.[229]
The Committee concluded that credit regulation ‘has failed to keep pace with
the rapidly evolving and growing credit market’ and is ‘ineffective in dealing
with the new practices that have emerged’.[230]
The Committee recommended that, in future, the Australian Government should regulate
credit products and advice, including regulation of mortgage brokers and
non-bank lenders.[231]

55.170 The states
and territories have sought generally to maintain harmonisation of consumer
credit law through the uniform Consumer Credit Code. Issues concerning
responsible lending are included on the current Strategic Agenda[232]
of the Ministerial Council on Consumer Affairs.[233]

55.171 In
addition, Australia’s consumer policy framework (including the Consumer
Credit Code) is subject to a current review by the Productivity Commission.
In its draft report, released in December 2007, the Productivity
Commission made a draft recommendation that responsibility for regulating
finance brokers and other credit providers should be transferred to the
Australian Government, with the regulatory requirements encompassed within the
regime for financial services administered by the Australian Securities and
Investments Commission. As part of this transfer, the Productivity Commission
suggested that the Consumer Credit Code and related credit regulation,
appropriately modified, should be retained and that federal, state and
territory governments ‘should give priority to determining the precise
requirements, and how they would be best incorporated within the broader
regime’.[234]

55.172 As
observed by Veda Advantage, industry and consumer stakeholders often
‘contextualise’ discussion of credit reporting regulation by reference to
concerns about responsible lending and consumer credit regulation more
generally.[235]
The UCCCMC observed that the existence of more comprehensive reporting is
‘relevant to any decision about the feasibility of imposing a statutory
requirement on lenders to assess capacity to repay’.[236]

55.173 On the
other hand, industry has expressed the view that privacy law (including reform
of the credit reporting provisions) should not be used as a ‘proxy measure to
mitigate consumer harms that are more properly dealt with in other
jurisdictions’[237]
or as a ‘vehicle for indirectly regulating consumer lending’.[238]

The better view is that if, as
a matter of policy, the government determines that additional obligations with
respect to responsible lending should be imposed on credit providers, those
obligations should be imposed directly through the consumer credit laws.[239]

55.174 Assisting
credit providers to practise responsible lending is the most compelling
argument for more comprehensive credit reporting. Some have questioned,
however, whether more responsible lending will be an outcome of introducing
comprehensive credit reporting, in the absence of new legislative obligations
on credit providers.[240]

55.175 In the
ALRC’s view, it would be inappropriate for this Inquiry to recommend specific
changes to the Consumer Credit Code or other consumer credit
legislation. Legislation relating to responsible lending is not referred to
expressly in the Terms of Reference of the Inquiry—although, as is standard,
the Terms of Reference direct the ALRC to consider ‘any related matter’. More
importantly, specific changes to consumer credit legislation were not a focus
of detailed consultation during the course of the Inquiry.

55.176 As
discussed above, however, the ALRC established that there is a clear link
between this issue and the possible implementation of more comprehensive credit
reporting. The additional categories of personal information to be included in
credit reporting information recommended in Recommendation 55–1 can be
seen as an incremental extension of existing permitted content. Permitting the
inclusion of repayment performance history, however, would be a more
significant change.

55.177 The ALRC
recommends, therefore, that repayment performance history only should be
permitted to be contained in credit reporting information if the Australian
Government is satisfied that there is an adequate framework imposing
responsible lending obligations in Commonwealth, state and territory
legislation. In making this assessment reference could be made to the
Productivity Commission’s report on Australia’s consumer policy framework, this
ALRC Report, and any future review of the Consumer Credit Code.

Regulating for permitted content

55.178 In
Chapter 56, the ALRC recommends that the new Privacy (Credit Reporting
Information) Regulations should prescribe an exhaustive list of the
categories of personal information that are permitted to be included in credit reporting
information. This list should be based on the provisions of s 18E of the Privacy
Act, subject to the changes set out in Recommendations 55–1, 55–2, 56–2 to
56–4, 56–6, 55–8 and 55–9.

55.179 Periodic
review of the regulations would provide adequate flexibility for industry,
while protecting the privacy of individuals. Given the relative resources of
industry and consumer stakeholders, any further reduction in privacy caused by
expanding the permitted content of credit reporting information should be subject
to parliamentary scrutiny and consultation with consumer groups, privacy
advocates and the regulator.

55.180 It would
be appropriate, however, for detail on how repayment performance history is to
be recorded to be set out in the credit reporting code. As discussed in
Chapter 54, the ALRC recommends that credit reporting agencies and credit
providers should develop, in consultation with consumer groups and regulators,
including the OPC, a credit reporting code providing detailed guidance within
the framework provided by the regulations.[241]
The credit reporting code should deal with a range of operational matters,
including procedures for the reporting of repayment performance history.

Permissible retention periods

55.181 Part IIIA
of the Privacy Act contains detailed provisions requiring credit
reporting agencies to ensure that personal information contained in credit
information files is deleted after the expiry of prescribed maximum permissible
periods.[242]
As discussed in Chapter 58, the ALRC concludes that there is no compelling
case for any major change to the existing retention periods and recommends that
the regulations should provide for the deletion of different categories of
credit reporting information after the expiry of maximum permissible periods,
based on those currently applying.

55.182 A new
retention period, however, needs to be set for new permitted content of credit
reporting information—that is, information about open credit accounts and their
current limits, and credit accounts that have been closed. No new retention
period needs to be set for repayment performance information, because the new Privacy
(Credit Reporting Information) Regulations should provide that only
information relating to an individual’s credit over the prior two years is to
be included. The ALRC recommends that the regulations provide for the deletion
of credit account information two years after the date on which a credit
account is closed. This would ensure that repayment performance information
about accounts that have been closed is retained for no longer than that
relating to current credit accounts.

Recommendation 55-1 The new Privacy (Credit
Reporting Information) Regulations should permit credit reporting
information to include the following categories of personal information, in
addition to those currently permitted in credit information files under the Privacy
Act:

Recommendation 55-2 Subject to
Recommendation 55–3, the new Privacy (Credit Reporting Information)
Regulations should also permit credit reporting information to include an
individual’s repayment performance history, comprised of information
indicating:

(a) whether, over the prior two
years, the individual was meeting his or her repayment obligations as at each
point of the relevant repayment cycle for a credit account; and, if not,

(b) the number of repayment cycles
the individual was in arrears.

Recommendation 55-3 The Australian Government
should implement Recommendation 55–2 only after it is satisfied that there
is an adequate framework imposing responsible lending obligations in
Commonwealth, state and territory legislation.

Recommendation 55-4 The credit reporting code
should set out procedures for reporting repayment performance history, within
the parameters prescribed by the new Privacy (Credit Reporting Information)
Regulations.

Recommendation 55-5 The new Privacy (Credit
Reporting Information) Regulations should provide for the deletion of the
information referred to in Recommendation 55–1 two years after the date on
which a credit account is closed.

[157] See,
eg, Consumer Affairs Victoria, The Report of the Consumer Credit Review (2006), 273. In its response to the Victorian Review, the Victorian Government observed that this lack of consensus makes it difficult to determine whether more comprehensive credit reporting would in practice ‘enhance decision making’ by credit providers: Victorian Government, Government Response to the Report of the Consumer Credit Review (2006), 46.

[163] Australian Law Reform Commission, Review of Australian Privacy Law, DP 72 (2007), [51.165]. The Barron and Staten (2007) research found that an ‘intermediate model’ between the existing Australian and US credit reporting systems would provide ‘some 71% of the reduction in delinquencies achievable under the full US scenario’: M Staten and J Barron, Positive Credit Report Data Improves Loan Decision-Making (2007) Australian Finance Conference, 6. The ALRC’s proposed model allows additional categories of credit reporting information to those under the assumed ‘intermediate model’ and would, therefore, be more rather than less predictive.

[180] This
scenario was described as assuming the use of the following data ‘current
Australian bureau; information on some credit accounts only; extreme negative
information only’: Ibid.

[181] This
scenario was described as assuming the use of the following data ‘information
on all credit accounts; opened date; whether active; limits’, including
‘consumer or business account; number of account-holders; whether PL is secured
or unsecured’: Ibid.

[182] This
scenario was described as assuming the use of the following data ‘information
on all credit accounts; ALRC information +; delinquency history’, including
‘consumer or business account; number of days in excess; whether PL is secured
or unsecured’: Ibid. The ALRC understands that the term ‘account payment
status’ in the table means information about the number of days, if any,
account payments are overdue and is, therefore, a subset of ‘repayment
performance history’, as that term is used by the ALRC in this chapter.

[183] This
scenario was described as assuming the use of the following data ‘information
on all credit accounts; ALRC information +; delinquency history; repayment
history’, including ‘consumer or business account; number of days in excess;
whether PL is secured or unsecured; value, number and dates of repayment’: Ibid.

[184] This
scenario was described as assuming the use of the following data ‘current
arrangement in the USA (FICO); information on all credit accounts; balance and
repayment history; transaction/purchase information; delinquency history’,
including ‘consumer or business account; amount due (credit cards); time and
value in excess’: Ibid.

[186] One of the contributing studies, conducted by Westpac,
concluded that the ALRC proposal would provide 38% of the predictive value of
comprehensive credit reporting and the ARCA model would provide 60% of the
potential predictive value: Westpac, SubmissionPR 472, 14 December 2007.

[187] For
example, the ALRC proposal, as described in DP 72, would also permit the
use of information about closed accounts: Australian Law Reform Commission, Review of Australian Privacy Law, DP 72 (2007), Proposal 51–1. The ARCA proposal, as described in ARCA’s submission, would not permit the use of the values of repayments: Australasian Retail Credit Association, SubmissionPR 352, 29 November 2007.

[198] Banking and Financial Services Ombudsman Ltd, SubmissionPR 263, 21 March 2007. The Consumer Action Law Centre also considered that improved complaint-handling and enforcement mechanisms should be more of a priority than the possible introduction of more comprehensive reporting: Consumer Action Law Centre, SubmissionPR 274, 2 April 2007.

[210] Galexia stated that ‘this provision has proved to be
difficult to use in practice’. The provision ‘does not require any proactive
steps by credit providers and it usually involves considerable time, expense
and legal representation to re-open a credit contract on the grounds that it is
unjust’: Galexia Pty Ltd, SubmissionPR 465, 13 December 2007.

[228]Parliament of Australia—House of Representatives Standing Committee
on Economics Finance and Public Administration, Home Loan Lending: Inquiry
into Home Loan Lending Practices and the Processes Used to Deal with People in
Financial Difficulty (2007).

[229]Ibid, 43. The Consumer Credit Code
makes a distinction between credit ‘provided or intended to be provided wholly
or predominantly for personal, domestic or household purposes’, which is
regulated by the Code, and other credit, which is not: Consumer Credit Code s 6(1)(b).

[230]Parliament of Australia—House of Representatives Standing Committee
on Economics Finance and Public Administration, Home Loan Lending: Inquiry
into Home Loan Lending Practices and the Processes Used to Deal with People in
Financial Difficulty (2007), 49.